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Asian Traders' Demand to Buy Gold Subdued as China Hits 'Liquidity Trap', Shanghai Shares Sink

BUY GOLD bids in London held prices unchanged by the end of Thursday's wholesale trade, with a $5 rally – and a $5 drop – erased as European and US equities fell following the worst 1-day loss in Shanghai's stock market since January.
 
China's key share index sank more than 6% after three large brokerages tightened their margin financing rules.
 
With the market valued at some $5 trillion today, the total amount of margin finance hit a record equal to $320bn on Tuesday, says Reuters.
 
Turnover in China's stock market today hit a record in so-called 'A' class shares of mainland-listed businesses.
 
"Precious metals subdued," says one London bullion bank, "with 2-way flow emerging...[but] metals consolidating near the recent lows, with little conviction."
 
The dealers did however see "some light physical demand" to buy gold from Asian traders.
 
With Dollar prices in London virtually unchanged this morning from when the Shanghai Gold Exchange closed Wednesday, premiums for metal delivered in China edged back, slipping below $1 per ounce on the main contract in steady trade.
 
Trading volumes to buy and sell Shanghai's international gold contract, in contrast, rose to 2-week highs as the premium for metal stored in the city's free-trade zone – and dealt for Yuan held in offshore accounts  – slipped around 40 cents to just below $2 per ounce above comparable London quotes.
 
After warning on deflationary pressures in the world's second largest economy yesterday, the People's Bank of China today drained some $16 billion of Yuan from the domestic banking system, by selling short-term repurchase agreements.
 
"A China-style liquidity trap is taking place," Bloomberg quotes China Everbright's chief economist Xu Gao in Beijing.
 
"The central bank has pumped a lot of money into the banking system, but banks can't find places to lend the money. So the banks are actually asking the central bank to take back some liquidity."
 
The US Dollar meantime hit new 12-year highs against the Japanese Yen after new data showed growth in Japanese retail sales slowing to 5% 
 
Commodity prices edged lower, but major Eurozone government debt prices further recovered as a 'source' told journalists that Germany's delegation to the current G7 meeting in Dresden said the recent volatility was a "correction" from the previous high prices, and not a cause for concern.
 
IMF managing director Christine Lagarde meantime refuted suggestions from Greek sources that the "troika" of Athens' bail-out lenders were near a "comprehensive solution" with the Syriza government.
 
"Gold in Euro [terms] has stabilized," says a technical analysis from London market maker Societe Generale, pointing to "consolidation since early January within a flag pattern" which is likely to see prices continue their rise once resistance €1130 per ounce is broken.
 
Prices to buy gold with Euros today moved tightly around €1087 – some 5% above last month's low, and 7% beneath January's surge to 20-month highs.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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